Asset life, leverage, and debt maturity matching

Thomas Geelen, Jakub Hajda, Erwan Morellec, Adam Winegar

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.

Original languageEnglish (US)
Article number103796
JournalJournal of Financial Economics
Volume154
DOIs
StatePublished - Apr 2024

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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